The Securities and Exchange Commission has charged the former partner in charge of KPMG's Pacific Southwest audit practice and his friend with insider trading on nonpublic information about firm clients.

The SEC alleges that Scott London, 50, the lead audit partner on KPMG’s audits of Herbalife and Skechers, tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements (see KPMG Resigns from Herbalife and Skechers Audits after Senior Partner is Implicated in Insider Trading). Shaw, 52, is the owner and operator of Shaw Diamond Co., a jewelry business in Encino, Calif.

In a parallel action, the U.S. Attorney’s Office for the Central District of California announced criminal charges against London on Thursday.

London and Shaw met at a country club several years ago and became close friends and golfing partners, according to the SEC. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn. In exchange for the illegal trading tips, Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.

London, a CPA who lives in Agoura Hills, Calif., and worked at KPMG for nearly 30 years, recently informed the firm that he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients. The firm immediately terminated him.

London began providing Shaw with nonpublic information in October 2010 and the misconduct continued for the next 18 months, according to an SEC complaint filed in a Los Angeles federal court. Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.

According to the SEC’s complaint, London was the lead partner on several KPMG audits including Herbalife and Skechers USA, and he was the firm’s account executive for Deckers Outdoor Corp. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results. Shaw, who lives in Lake Sherwood, Calif., routinely traded at least a dozen times on the inside information he received from London. He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers and Deckers.

The SEC alleges that London also gained access to inside information about impending mergers involving two former KPMG clients: RSC Holdings and Pacific Capital. London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.

According to the SEC's complaint, in addition to the bags of cash and the Rolex watch valued at $12,000, Shaw gave London several pieces of expensive jewelry for his wife and routinely covered the costs of dinners and concerts the two men shared along with their families.

“London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex,” said SEC acting director of enforcement George S. Canellos in a statement.

Michele Wein Layne, director of the SEC's Los Angeles Regional Office, added, “As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties.”

The SEC’s complaint charges London and Shaw with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently ordering them to disgorge ill-gotten gains plus pay prejudgment interest and financial penalties, and enjoining them from future violations of these provisions of the federal securities laws.

KPMG LLP chairman and CEO John Veihmeyer issued a statement upon reviewing the criminal complaint filed against the firm's former partner. "I was appalled to learn of the additional details about Scott London's extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets," he said. "We unequivocally condemn his actions, and deeply regret the impact that his violations of trust and the law have had on our clients and our people. KPMG will be bringing legal actions against London in the near future. As a result of his unlawful activities, it was clear that our independence had been impaired with respect to the two companies for which he served as lead partner, Herbalife and Skechers. Due to this impairment, we were professionally obligated to take the regrettable action to resign as the independent auditor for these two companies and withdraw our previously issued audit reports.  The sole reason for these steps was the actions of our former partner and we have no reason to believe that their financial statements are materially misstated."

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